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Consultants in Bank Lawsuit Saved by the (Statute of Limitations) Bell

Wed, 01/23/2019 - 22:57

Christmas arrived early for two environmental consulting firms when a federal district court ruled in Bank United, N.A. v. Merritt Environmental Consulting Corp, 2018 U.S. Dist. Lexis 214448 (S.D.N.Y. 12/20/2018) that a lender had waited too long to file a complaint against the consultants for failing to identify radioactive contamination in a phase 1 environmental site assessment. The outcome was based on provision of the New York statute of limitations (SOL) that allows breach of contract actions to be governed by the shorter for professional malpractice SOL.

Because the court granted the defendants’ motion to dismiss, the evidentiary record is not well-developed. The briefing was focused on which statute of limitations should apply. We have used facts from the briefs, from a related lawsuit filed by the property owner/borrower against a variety of potential responsible parties in 105 Mt. Kisco Associates v Caraozza et al, 2017 U.S. Dist. Lexis 47855 (S.D.N.Y. 3/30/17) as well as information from publicly-available databases.

Environmental History

During World War II, the property that was subject to the BankUnited mortgage was part of a nuclear refinery that was owned and operated by Canadian Radium and Uranium Corporation (CRU). The refinery extracted radium and polonium from the uranium residues for use by the Manhattan Project.  After World War II, CRU shifted to producing commercial-grade radium from instruments and watch dials.

Apparently, CRU had a sloppy operation which caused extensive radiological contamination. Radiological surveys conducted by the Atomic Energy Commission (“AEC”) in 1952 and 1956 identified “significant radiation levels, removable contamination and airborne radioactive material concentration” In the late 1950s, CRU pled guilty to charges of allowing three employees to be overexposed to radiation. CRU was ordered to remove radioactive waste within the buildings but this work did not involve any soil remediation.

In 1966, the Mt. Kisco Urban Renewal Agency (“MKURA”) acquired the CRU facility, decontaminated and demolished the structures, graded the site and constructed a new road where one of the CRU buildings. The contaminated building materials were disposed off-site at the Croton Point Sanitary Landfill. Grading activities spread contaminated soils throughout the former CRU facility.

In the 1970s, the MKURA conveyed the property to the Village of Mt. Kisco (“Village”) which, in turn, transferred the CRU facility property to a private developer who subdivided the parcel and constructed three buildings. From the mid-1970s to 2012, a series of lumber businesses owned and operated the property with a street address of 105 Mt. Kisco Avenue.

In 1979, the Westchester County Department of Health (WCDOH) performed a limited radiological survey. Because the highest dose rates were found in an area surrounded by a high chain link fence that was not used by the public, the WCDOH concluded there was no public health risk but forwarded the radiation survey to the radiation branch of the federal Environmental Protection Agency (“EPA”), the New York State Department of Environmental Conservation (“NYSDEC”) and New York State Department of Health (“NYSDOH”).

In 1987, the former CRU facility was evaluated for inclusion on the Department of Energy (DOE) Formerly Utilized Sites Remedial Action Program (FUSRAP) list. DOE determined the former CRU facility was not eligible for the FUSRAP program because it had been commercial operation that had not been under the jurisdiction of DOE’s predecessor-AEC

After NYSDEC became aware of the FUSRAP evaluation in 1993, the agency asked NYSDOH to conduct a survey of the former CRU site. The survey detected elevated levels of gamma ray and radon levels at the site owned and occupied by Richard’s Home Center and Lumber, Inc (RHCL). Radon levels inside RCHL were higher than average for residential structures in the Village. The NYSDOH advised that further construction on the RHCL parcel should be curtailed until more data was available to assess the extent of the contamination.

Between 1993 and 1995, the federal Environmental Protection Agency (“EPA”) conducted a preliminary assessment and site inspection under the federal Superfund program. Although “hot spots” of elevated radioactivity exposure rates were noted, EPA concluded the site was not a candidate for the National Priorities List. The CRU facility was archived the on the CERCLIS site.

In July 1998, the NYSDEC conducted a comprehensive radiological survey of the former CRU plant to evaluate the extent of the remaining radioactive contamination and help the Village determine if land use should be limited. NYSDEC found that highest levels of radium-contaminated soils were present under the parking lot and outside storage of the RHCL parcel to a depth of about four feet.  NYSDEC suggested the property owners consider removing the most impacted soils and that no soil excavation should occur until the parcels are fully characterized.

In September 2013, EPA engaged Weston to perform a site reassessment investigation. Weston collected outdoor gamma screening levels in the outdoor sheds and other storage buildings at the RHCL property but RHCL did not allow Weston to collect indoor gamma level screenings. The highest gamma readings were in the rear of the RHCL parcel. Weston returned in November 2013 to collect soil samples.

The Phase 1 Report and ESA Desktop Review

RHCL went into default on its mortgage with Community Mutual Savings Bank (CMSB) in 2012. The principal of RHCL, Paul Carazzo, and a local developer, Mark Stagg, formed a new business venture whereby RCHL sold the property to Amanda Lane LLC, an entity owned by Stagg. Amanda Lane LLC assumed the obligations of the CMSB mortgage.  The two men then formed two LLCs– 105 Mt. Kisco Associates LLC and NY Stone and Landscape Supply (NY Stone). 105 Mt. Kisco was to acquire the land from Amanda Lane and then lease it to NY Stone to operate a masonry and lumber store.

To facilitate the transaction, 105 Mt. Kisco Associates LLC applied for a $3.25MM mortgage from BankUnited.  In November 2013, BankUnited retained Merritt Environmental Consulting Corp (MECC) to perform a Phase I report. In discussing the Sanborn Maps for 1932-1949, the MECC Report stated that the southern portion of the property contained a lumber shed, an auto sales and service facility, and a woodworking facility while the northern portion of the property contained commercial and residential buildings. The report not only failed to id not indicate that the parking lot of the RHCL parcel had once been a part of the CRU facility but the section titled “Historical Use Information on Adjoining Properties” failed to mention CRU. However, the EDR database search identified the CRU facility as a hazardous substance waste disposal site (HSWDS) within1/8 mile from the Property. MECC recommended a phase 2 but it was for the purpose of assessing impacts from former petroleum tanks that had been identified on Sanborn maps. MECC did not discuss the possibility that the RHCL parcel was potentially impacted with radiological contamination by the former CRU plant

In March 2014, BankUnited retained Lender Consulting Services (LCS) to confirm that the MECC phase 1 satisfied the ASTM 31527-05 standard so that the bank could qualify for the CERCLA innocent landowner. The briefs indicated that LCS had done this work pursuant to a master services agreement for performing phase 1 reports, not simply reviewing reports for ASTM compliance.

BankUnited closed on the mortgage on March 20, 2014 and required a $40K escrow to remediate any potential impacts from the historic petroleum storage tanks identified in the MECC Report.

Post-Closing Developments

In June 2014, Weston issued a Site Reassessment Letter discussing its 2013 investigation. Weston reported that soil samples from paved and unpaved areas of what was now the NY Stone premises had elevated levels of radium, contaminated sediments in a drainage ditch that received stormwater runoff from the property and that there was a potential for groundwater contamination because of the proximity of the contaminated soil to the water table.

In June 22, 2015, the EPA, NYSDEC and NYSDOH met with the Mt. Kisco Associates to discuss the contamination. EPA advised the property owner that a cleanup was required. EPA commissioned Weston to conduct a Removal Assessment which included yet another radiological survey.

The August 2015, Weston issued a Removal Assessment report which found radon levels in excess of EPA Site-Specific Action Levels (“SSALs”) in the main building and in soil samples. 105 Mt. Kisco Associates did not notify BankUnited of the EPA investigations or that it had filed a lawsuit against potentially responsible parties including MECC until November 16, 2015. 105 Mt. Kisco Associates advised the bank that its consultant estimated the cleanup costs could range from $4MM to $30MM.

Beginning in April 2016, EPA engaged Weston to perform additional investigations. The Weston Phase II Report found elevated levels of alpha and beta particles, radium, bismuth, lead, and thallium.

On December 10, 2016, 105 Mt. Kisco Associates defaulted on its mortgage. Reasoning that foreclosure was not a viable remedy because of the presence of the radioactive contamination, BankUnited entered into a forbearance agreement on May 9, 2017 whereby the bank agreed to accept payments of interest while it contemplated its options. BankUnited subsequently commissioned an appraisal that determined that the property had “little to no value” because of radiological contamination and estimated cleanup costs. Indeed, the appraisal concluded stated that in its “As-Is” condition, the property had a zero value.

The Bank Litigation Against the Consultants

On July 13, 2017, 42 months after the loan closing and 20 months after it was notified of the contamination by its borrower, BankUnited filed a complaint against MECC, LCS, and their insurers. The complaint asserted breach of contract, professional malpractice, negligent misrepresentation and declaratory action against the insurers.

Under the New York statute of limitations (SOL), breach of contract claims are generally subject to a six-year statute of limitations while actions for professional malpractice must be commenced within three years. The defendants filed a motion to dismiss the breach of contract and misrepresentation claims on grounds that they were merely duplicative of professional malpractice claim. The defendants also argued that the professional malpractice count should also be dismissed because the complaint was brought after the three year SOL had expired.

The court began its analysis by noting that the New York State legislature amended the professional malpractice SOL in 1996 in response to a line of cases that applied a six-year breach of contract SOL to nonmedical malpractice claims. Prior to the 1996 amendments, the applicable SOL in a nonmedical malpractice action depended on the proposed remedy, not on the theory of liability. The 1996 amendment provided that where the underlying complaint claims there was a failure to utilize reasonable care or where acts of omission or negligence are alleged, the applicable SOL will be three years regardless of the theory of liability.

The court noted that the breach of contract count claimed MECC and LCS failed to act “‘in a manner consistent with that level of care and skill ordinarily exercised by other professional consultants under similar circumstances at the time the Services are performed” and by failed to perform the ESA in accordance with ASTM Standard E 1527-05. Therefore, the court held that the truncated professional malpractice SOL applied to the breach of contract count so long as MECC or LCS qualified as “professionals”

The court then turned the question of who is a “professional” for purposes of the professional malpractice SOL. BankUnited claimed the individuals who performed the work for MECC and LCS did not qualify as professionals because they did not hold professional licenses. The court rejected this argument, explaining that the New York Court of Appeals has held that the meaning of “professional” for purposes of the SOL was to be guided by:

“[t]he qualities shared by such groups” as lawyers, doctors, architects, engineers, and accountants, which qualities include extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards. Additionally, a professional relationship is one of trust and confidence, carrying with it a duty to counsel and advise clients.”

The court said the allegations in the breach of contract count resembled many of the criteria in the passage from the Court of Appeals opinions. Examples the court found instructive were that complaint asserted the defendants were bound by applicable professional standards set forth by ASTM E1517 and failed to act “with the skill ordinarily exercised by professional environmental consultants”.  Moreover, the complaint stated that plaintiff’s relationship with MECC and LCS was one of “trust and confidence” and that the defendants were hired to “counsel and advise”. In addition, the court said that environmental consultants performed a duty analogous to a real estate appraiser — a vocation that has been held to qualify as professional under the professional malpractice SOL.

BankUnited also argued that the fact the defendants satisfied the definition of “Environmental Professional” for purposes of the EPA All Appropriate Inquiries rule did not mean they were a professional for purposes of the professional malpractice SOL. However, the court found that the requirements to satisfy the AAI definition was the kind of extensive, albeit informal, training articulated by the New York Court of Appeals

Thus, the court found the defendants met the definition of a professional and that the truncated three-year SOL for professional malpractice applied to the breach of contract action.

Turning to the negligent misrepresentation claim, the court noted that claims for negligent misrepresentation are subject to a three-year SOL unless the claim was based on actual or constructive fraud which are governed by a six-year SOL .The court said plaintiff did not plead actual fraud but suggested it pleaded constructive fraud based on “‘the existence of a fiduciary or confidential relationship between the parties. The court explained that the plaintiff’s only support for its constructive fraud claim “was a single conclusory sentence” that MECC had a special relationship with BankUnited because MECC and its staff held themselves out as ‘Certified Environmental Specialists.” However, the court said that it could find any authority for the proposition that “Certified Environmental Specialists” are in a special relationship with their clients to justify imposing additional obligations on them. Because the only misrepresentations alleged in the complaint were the failure to uncover the conditions that Plaintiff alleged MECC and LCS would have found had they performed up to professional standards, the court found the negligent misrepresentation claim “stand[s] in the shadow of negligence” rather than in the “shadow of fraud.” In the absence of any plausible claim of constructive fraud, the court ruled the three-year SOL applied to Plaintiff’s negligent misrepresentation claims.

Plaintiff argued  that even if its claims were subject to a three-year SOL, these claims did not accrue until BankUnited discovered the radioactive condition on the Premises, or, alternatively, that the SOL did not begin to run until the bank suffered damages, which it alleged was either when the contamination became public through the 2015 EPA report or the series of news articles reporting on the conditions of the premises in 2016.

However, the court held that the discovery exception applied to exposure to latent contamination and the bank had not alleged such injury. Because the bank did not allege that conditions became more dangerous after the closing and did not plead a latent, exposure-induced harm, the court rules the discovery rule did not apply and there was no ground to adjust the accrual date of Plaintiff’s claims.

The bank also claimed that the SOL did not start to run until it sustained an actual injury which it was when the Premises was rendered worthless. A claim for professional malpractice accrues when the malpractice is committed or when all the facts necessary for the cause of action have occurred and an injured party can obtain relief in court. In this case, the court found that the SOL began to run when the MECC and LCS delivered their reports and the bank had relied on them to close the loan.

Because Plaintiff’s breach of contract, professional malpractice, and negligent misrepresentation claims accrued by March 20, 2014 and the complaint was not was commenced until July 13, 2017, the court ruled the banks claims against the consultants were barred by the SOL

The New York SOL is unusual. In another state, the breach of contract count would have survived, the parties would have proceeded to discovery and we might have found out why the phase 1 failed to discover the site’s atomic legacy. In any event, the case serves as a lesson to lenders to make sure they understand the applicable state SOL when determining how to proceed with a defaulted loan.

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